Blossom Farms reports the following results for the month of November: Sales ( 11,000 units) $ 660,000 Variable costs 462,000 Contribution margin 198,000 Fixed costs 121,000 Net income $ 77,000 Management is considering the following independent courses of action to increase net income. 1. Increase selling price by 5% with no change in total variable costs. 2. Reduce variable costs to 66 ²/³% of sales. 3. Reduce fixed costs by $ 10,000. Calculate net income for the above courses of action. Calculate net income for the above courses of action. Course Net Income 1. Increase selling price $ enter a dollar amount 2. Reduce variable cost $ enter a dollar amount 3. Reduce fixed cost $ enter a dollar amount If maximizing net income is the objective, which is the best course of action? Best course of action is ______________
Cost-Volume-Profit Analysis
Cost Volume Profit (CVP) analysis is a cost accounting method that analyses the effect of fluctuating cost and volume on the operating profit. Also known as break-even analysis, CVP determines the break-even point for varying volumes of sales and cost structures. This information helps the managers make economic decisions on a short-term basis. CVP analysis is based on many assumptions. Sales price, variable costs, and fixed costs per unit are assumed to be constant. The analysis also assumes that all units produced are sold and costs get impacted due to changes in activities. All costs incurred by the company like administrative, manufacturing, and selling costs are identified as either fixed or variable.
Marginal Costing
Marginal cost is defined as the change in the total cost which takes place when one additional unit of a product is manufactured. The marginal cost is influenced only by the variations which generally occur in the variable costs because the fixed costs remain the same irrespective of the output produced. The concept of marginal cost is used for product pricing when the customers want the lowest possible price for a certain number of orders. There is no accounting entry for marginal cost and it is only used by the management for taking effective decisions.
Blossom Farms reports the following results for the month of November:
| Sales ( 11,000 units) | $ 660,000 | ||
| Variable costs | 462,000 | ||
| Contribution margin | 198,000 | ||
| Fixed costs | 121,000 | ||
| Net income | $ 77,000 |
Management is considering the following independent courses of action to increase net income.
| 1. | Increase selling price by 5% with no change in total variable costs. | |
| 2. | Reduce variable costs to 66 ²/³% of sales. | |
| 3. | Reduce fixed costs by $ 10,000. |
Calculate net income for the above courses of action.
Calculate net income for the above courses of action.
|
Course
|
Net Income
|
|||
|---|---|---|---|---|
|
1.
|
Increase selling price
|
$ enter a dollar amount | ||
|
2.
|
Reduce variable cost
|
$ enter a dollar amount | ||
|
3.
|
Reduce fixed cost
|
$ enter a dollar amount |
If maximizing net income is the objective, which is the best course of action?
| Best course of action is ______________ |
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